Patriarch Partners and CEO Lynn Tilton won dismissal on Wednesday of charges brought by the Securities and Exchange Commission alleging improper asset valuation and performance disclosure with three collateralized loan obligation funds with a collective $1.5 billion in assets.
After a five-year investigation that began in late 2009, SEC officials charged the firm in April 2015, and Patriarch Partners and Ms. Tilton immediately filed legal challenges, including questioning the constitutionality of the SEC's in-house administrative law judge process. The SEC's enforcement division sought a cease-and-desist order, industry bars, disgorgement and civil penalties.
In dismissing the charges, Carol Fox Foelak, SEC administrative law judge, said the allegations were unproven. She noted that the noteholders in the three Zohar CLO funds "were sophisticated, institutional investors" and that while Patriarch "did not maximize the ease of finding it, they also did not conceal … material information."
The order dismissed Ms. Tilton's challenge to the constitutionality of the process, noting that "the commission and the courts have rejected broad attacks on administrative process."
In an emailed statement, Ms. Tilton said the case "was rooted in a fundamental misunderstanding of the design of the Zohar funds and Patriarch's investment strategy and should never have been brought. As Judge Foelak noted in her ruling, the SEC's claims failed to take into account that the applicable legal documents clearly gave me 'wide discretion to amend the terms' of the loan agreements and stresses that I disclosed (the funds') business model to noteholders.
"I fought against this case not only for myself but also for the thousands of hard-working employees at my portfolio companies and for all those individuals, past and present, who have faced unwarranted and malicious actions by the SEC. I can only hope that this vindication will deter the future abuse of power that comes with government overreach," Ms. Tilton said.